The Financial Industry Regulatory Authority (FINRA) has issued an Investor Alert warning investors not to choose risky yet high-reward asset classes over more traditional investments.
While riskier and more complex products promising higher returns may seem attractive compared to fixed-income options, for which yields are at historic lows, FINRA does not believe investors should use this as the motivation for their investment choices.
“Investors should never make an investing decision solely by looking at an investment’s return, whether past or projected," the alert stated. "Higher returns come with higher risk. Investors should always look behind an investment’s yield, ensure that they understand how the investment works and carefully consider its fees and risks before investing,”
FINRA believes that structured retail products, which offer higher returns and sometimes even a level of principal protection, fall into this category due to the “significant drawbacks” they possess such as credit risk, market risk, lack of liquidity, and high hidden costs.
Leveraged products, such as ETFS and mutual funds, were also singled out by FINRA due to their daily design, meaning that they are designed to “reset” each day and “achieve their stated objectives on a daily basis.” As a result, their long-term performance can greatly differ from the performance of their underlying asset.